tv Bloomberg Real Yield Bloomberg January 7, 2018 4:30am-5:00am EST
>> 30 minutes dedicated to fixed income. this is "bloomberg real yield." ♪ jonathan: coming up, u.s. payrolls disappoint. unemployment sticks at 4.1%. one week of unexpected jobs report is unwed test unlikely to -- unlikely to derail for federal reserve. economic data in europe looks hot, inflation calls. we begin with the big issue, the payrolls report.
>> it isn't bad, would not overreact to this report. >> growth in the jobs market is solid. >> disappointing in many ways. >> .3% in wage growth. 2.5% over the last 12 months. we could still be on a path up to 3%. that would be a sign of improvement in the jobs market. >> the wages would be .3, revisions back down to .1. .2 per month is what we are looking at. if you can get wages going, you can get inflation going, which is what the fed wants to get going. >> i do think you are seeing pretty solid labor markets that are not extremely overheating, but it is a good thing for market and equities. >> this is not a labor market humming along, it is not consistent with needing to raise rates. it pushes the fed's possibility of raising.
this is a labor market that potentially looks like it is beginning to slow. >> the labor market is really hot. the run rate for job growth is a low 100,000. anything above that is taking away the slack in the labor market. >> the labor market is not hot, it is slowing and relatively weak. >> as the economy continues to grow and as the labor force tie-ins, unemployment rate is still 4.1 percent in 17 year lows. we will see real wage pressure in here. jonathan: joining me in new york is michael, head of u.s. rate strategy. kathy jones, chief fixed income strategist for financial research, and chief investment officer at oppenheimer. do you just want to jump into the debate and help us out? >> i think it is warm, it is solid. it is moving along. you only need to create about 100,000 or less jobs to keep diminishing the slack in the labor market. underneath it all, there was good news.
participation rates of prime age workers are moving higher. it is well above where it has been over the last five or six years. people are coming back into the labor market and things are moving on. >> from a markets perspective, even if it is classified as not so hot, it does not matter. there is enough momentum in the economy and tax cuts are coming. the market will see it and that is what they are doing. we yield for backup. at the end of the day, economies on a mobile basis are doing well and that is what the markets are focused on. >> the biggest news is the change in sentiment in the market. a year ago, everyone would have been looking for the worst-case scenario. jonathan: at least not to do something. >> now we move for five minutes in the market went back to where was. people were much more willing to look beyond. jonathan: let's talk about what the market has been doing. it traveled below 50 basis points. what were your thoughts when that happened and how tight does that spread get? krishna: i think that trend will continue. in this environment it is a fools game. that is my opinion.
if there is truly inflation, then markets would anticipate that the fed will slam on the rates really hard. we are talking about the recession. yes, for a tiny bit, we may see that, but it is a flattening trend for the rest of the year. kathy: i would say a little bit of steepening would not be to surprising. keep in mind the only reason i and it is moving up is because the short end is stuck. very narrow range. i think we have to get a little bit more supply observed by the market. 2018 and beyond. i would not be surprised to see a moderate amount of steepening.
krishna: i think we may see steepening, but that cannot last. markets would anticipate with a faster and gradual path. therefore a recession which gets us back to where we were. jonathan: stellar data, the united states, the pmi's in europe, then the inflation data is not tracking what i am seeing in the output numbers. whether it is the hard gdp figures, the labor market numbers, you would expect to see that. on the other side, higher inflation numbers. why don't you see that? michael: that is one of the great mysteries. we think we will see a little higher in inflation, but not that much. we do think those inflation fears, and the supply issues that you mentioned. in the past he year's supply has not mattered at all. we have gone to for par 5 trillion dollars to debt outstanding inmate 08 of government outstanding to we will hit 15 trillion by the middle of this year. but, just because we have not
seen a pressure does not mean you can go further and further forever. we will add $1 billion of additional debt every year for the foreseeable future. at some stage people will have to start to pay attention to that and we will have to have term premiums back into the curve. in the next announcement in early february, we will see 30 or options increase. -- 30-year option size increase. that is when people get scared about the supplies. jonathan: question from one of our viewers. he talked about the deregulation around banking. do you think there is a reason for the u.s. long end to sell off sharply if the banking deregulation bill kicks in and around q1 as suggested by gary cohen? kathy: i don't ignore happen -- think it will happen very quickly.
i think it will take some time for deregulation to work its way through the system to produce the kind of thing that will cause the long end to sell off really quick. in terms of all the regulatory tax changes, i am focused on the high-yield market. jonathan: we will talk about credit in a moment. i want to get your thoughts on the inflation dynamics. break-even rates are picking up. are we thinking about inflation this year? do you need to hedge out, or will it materialize through the year? krishna: as michael was saying, that is the mystery. i think inflation would pick up a tad. if it picks up a lot, i think we would see a much more forceful response from the feds. so, counting on break even. for inflation materializing, i don't think this year's context is real. jonathan: it was about term premium and what it would be to get it up.
from jp morgan. they said it is not coming. what is it to get term premier up and is it coming? krishna: i think it is coming after a recession, not before the recession. kathy: i think we have to have enough global growth to produce global inflation. i think holding back is there is a sluggish pace of global growth or of the last decade. the first year in a decade we have seen all the major country oecd countries starting to grow at the same time. what worries me is that the term premium is still negative. there is a lag effect with inflation. any surprise, the market is not priced for it at all. krishna: her point is a really good one. it has to come from overseas. the challenge there is in emerging markets. where you would expect this to
materialize. inflation expectations are relatively flat and that is why emerging-market rates are so well anchored. michael: we have had two pieces behind this flattening. one has been the low inflation and fed creeping higher that has been a long-term structural flattening. we have had this dramatic move from 100 basis points to 50 basis points. this has been a extreme pension bid. some of that may be related to tax changes. we think it will fade as the year goes on. we are expecting to continue support for the long end early in the year that we think that supply fears start to kick up and we will have a little fear later this quarter. jonathan: kathy jones and krishna will be sticking with me. next up, the auction block, mexico and argentina in a race with emerging markets. this is bloomberg real yield. ♪
♪ jonathan: this is "bloomberg real yield." we start with a look into the crystal ball for 2018. about $680 billion of high-grade u.s. dollars corporate bonds led by the banks. this is likely to be a signal of who will lead issue in 2018. outside of the united states there is a race to secure capital. this week, mexico completed a debt sale totaling 3.2 billion dollars.
total amounts reaching 15 billion. argentina sold $9 million in debt. 21 billion with half of the investors coming from north america. both countries to the frontage of the lowest borrowing cost in nearly eight decades. still with me, michael, kathy jones and krishna from oppenheimer funds. i want to begin with you. something struck me about last year. you expected risk assets to perform more broadly. junk lagged the s&p 500. why? why is our yield not keeping up with risk assets? krishna: the answer is simple. high-yield are just too tight. that is what it is, there is nothing magical. high-yield has had a substantial, substantial run over the last 7-8 years. we are at a spread level on the
sub 300, it is very difficult to get yourself to buy high-yield at that level and feel good about it. kathy: i would agree with krishna. the spreads are tight and valuations are high and credit quality keeps deteriorating. you add the tax bill onto it, which is not favorable for high-yield issuers. you do not have a great case there to be all in on high yields. jonathan: i caught up with bill gross and asked him about his exposure to high yields and whether he had any, and whether he should advise others. take a listen at what bill had to say on bloomberg radio and bloomberg tv. bill: spreads are very, very narrow and they follow the stock market. it is him as a 1-4 correlation. if the stock market goes up 1%, spreads and the price of the cd ask goes up by a quarter of that. jonathan: there is a huge difference between sitting here and saying 2018 is a year for coupon clipping, you will not get the capital returns you got over the past 20 years.
krishna: i have an issue with what he was saying. i do not think high-yield spreads are very attractive, but expecting them to widen, which is what you would have to have to have a short position, i don't think it is realistic. high-yield does ok, you could clip the coupon, but they do not widen meaningfully. if they do, it is probably in the back half of the year rather than the first half. we have enough global economic momentum, but equity does well and high-yield does well. jonathan: what are you looking to happen? his reasoning is what will happen at the front end of treasuries. at some time, we will test high yields. what levels are you looking for on a two-year treasury this year? get 4 rate will hikes this year. so we're going to go with that.
we think we will get more rate hikes next year as well. we think we will continue to see pressure on twos. the other issue with the front of the curve is the tax bill may have impacts on investment grade also. you have got over $2.5 trillion of trapped offshore cash, which is largely invested in u.s. fixed income assets. when that money comes home it is likely to be diverted to other purposes. you have this massive buyer base and you do not have $2.5 trillion shift in investment without leaving a mark. jonathan: they are eating their own cooking. they are the big buyers. what are you left with on the the repatriation story? kathy: they may not be as massive as everybody expects. it has been pretty modest. secondly, i think the balance will work itself out. in the investment grade area.
again, high-yield is another issue. it is related to, not only the spreads, but the tax bills than these ratios of interests expenses being high. jonathan: if we get michael's number four-rate rate hike, that has to mean something for credit. krishna: i hope michael is wrong. i think the market hopes michael is wrong, especially for this year and next year. if that is the case, we are looking at a recession in the not-too-distant future. if we get for rate hikes this -- if we get four rate hikes this year, and we expect two or three more next year, ipic we are looking at a recession. jonathan: this case right now is three. krishna: with a base case of three, the expectation is the u.s. economy starts slowing down. the case that michael is making, the u.s. economy is not slowing down, global economy continues to do well and we will go further in the path to normalization. we do not expects recession, we
believe this will be the longest cycle that all of us have ever experienced. having said that, if his views come about, that is what you should worry about. michael: on the repatriation, the difference between this time in the last time as last time you only got tacked on money you brought home. this time he get taxed whether or not. why would you just bring it home? on growth, the only thing that will stop the fed this year is, if we get massive movement in credit spreads, that will knock a rate hike out of the picture. that is the break on the fed. we do think we will see some periodic pressure, but a massive gap wider in risk assets. jonathan: i want to wrap things up. a few believe this could be the longest cycle ever, but you think spreads are too tight, then answer this, where did you take credit risks that will generate considerable capital returns?
you cannot be risk completely. krishna: buy equities if you are looking for capital returns. credit is supposed to provide you some level of income, not meaningful capital appreciation. within the credit market, the most attractive asset class is emerging-market local debt. that is driven by the high level of high rate levels, plus the fact that the dollar remained stable or continues to weaken. that is really the best case i can make for that. other than that, credit overall, if you clip the coupon, you consider yourself lucky. kathy: i think the most risk assets are highly valued, and emerging markets would not be my choice.
26% of that is in u.s. dollars and i think that the dollar has some room to move up. oftay at the short end investment grade. i do not think there is a place to hide right now. jonathan: sticking with me, kathy, michael and krishna. i want to get a check on what treasuries have been this week. yields up by eight basis points. 1.96%. we are zooming into the 2% level. up at the long in by seven by 31. the final spread, the week ahead featuring bank earnings and some important data coming out of america on the back end of the week. that is coming up in just a moment. this is "bloomberg real yield." ♪
jonathan: this is "bloomberg real yield." jonathan ferro. for our audience worldwide from new york city, it is time for the final spread. we get a series of u.s. economic reports, concluding on friday when we get cpi data and retail sales as well. they kick off big time with jpmorgan and wells fargo, bank earnings come through and politics has a lot going on. keep an eye on the french president as he heads over to china and talks in korea. that is something to keep an eye on. still with me around the table, some final thoughts. kathy, is that we you have your focus on, cpi? kathy: the usual for this time of month. decent readings on both. the important thing about cpi is, on a year-over-year basis it is likely to be higher for technical reasons. we had that big dip last year earlier in the year.
if you are looking at it year-over-year it will probably outperform what most people's expectations are. michael: same. we have had so much momentum recently that even if you got it soft, you still have a good quarter. you have an impressive gdp number. we are paying a little more attention to the data. inflation data. jonathan: at what point do think we have a tax cut, i will spend more money start to kick in? michael: normally when you get tax cuts it comes out of recession, everybody is terrified so people do not spend the money. you get one this point, you are likely to spend. you will start to get withholding changes going forward, so people do not start to see the cash immediately. it is not until april of next year that you -- that people will see the big change of what is in their wallet. krishna: the key thing to remember is corporate tax cuts and personal tax cuts. the impact will be muted to
begin with. you will see it, but you will see it in a very faded way. if at all. from an inflation standpoint, retail sales standpoint, as kathy said, both of them are looking good at this point. at the end of the day, for the markets, it does not matter. we firmly believe the -- the entire market firmly believes that we are in a growth momentum phase. whatever the data, we will look through that. jonathan: that the take away? forget the economic data? krishna: don't pay that much attention to the economic data for the first half of the year. it is bad for people like us, pontificator's, but it is a good situation for the markets. jonathan: we put you guys in your box and get quick final thoughts. we will go through a couple of questions. we begin. the growth rich inflation poor story, is that regime here to stay through 2018? michael: yes. krishna: yes. kathy: yes.
jonathan: could we had zero by -- hit zero by year-end? michael: no. kathy: no. krishna: yes. jonathan: the reduced yield exposure to zero, get out or stay in? michael: keep some in. kathy: reduce but stay in. krishna: stay in. jonathan: thank you all. michael, kathy and krishna. that does it for us this week as we kick off a brand-new year in 2018. happy new year to you. we will see you next friday at 12:30 p.m. new york, 5:30 in london. this was "bloomberg real yield." this is bloomberg. ♪ retail.
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